Getting a grip on decarbonization with effective internal carbon pricing

Investment Rating - The report emphasizes the importance of implementing effective internal carbon pricing (ICP) as a strategic approach for organizations to manage their carbon emissions and align with decarbonization goals, indicating a positive investment outlook for companies adopting these practices. Core Insights - Organizations face increasing pressure from regulators, consumers, and investors to monitor and reduce greenhouse gas (GHG) emissions, with 75 carbon pricing initiatives covering 24% of global GHG emissions as of 2024 [3][4] - Effective internal carbon pricing can enhance decision-making and incentivize sustainable practices, yet many companies only apply it marginally rather than as a core strategy [5][6] - A comprehensive, data-driven approach to ICP is essential for managing emissions across all scopes (1, 2, and 3) and requires collaboration across various corporate functions [6][19] Summary by Sections Regulatory and Market Drivers - Regulatory mechanisms, such as carbon taxes and cap-and-trade systems, are pushing companies to manage GHG emissions more effectively [7][8] - Market pressures from consumers and investors are also driving organizations to adopt better emissions management practices [8][9] Implementation of Internal Carbon Pricing - Companies should start by implementing ICP in a phased manner, beginning with major capital investments and gradually expanding to cover all material emissions [30][32] - The internal carbon price should be set based on factors such as the social cost of carbon, expected regulatory changes, and industry benchmarks [24][25][26] Case Studies and Examples - Swiss Re has set an internal carbon price that increased from $8/tCO2e in 2019 to$123/tCO2e in 2023, generating approximately $3.4 million for carbon removal initiatives [22][23] - Teijin expanded its ICP to include Scope 3 emissions and doubled its carbon price from €50/tCO2 to €100/tCO2 in 2023 [28] Strategic Recommendations - Organizations should involve all key corporate functions in the ICP process to ensure alignment and effectiveness [19] - Establishing a clear framework for how carbon pricing impacts financial metrics and decision-making is crucial for successful implementation [38][39]